American College of Physicians: Internal Medicine — Doctors for Adults ®


Fraud and abuse case study: Are this practice's investment options legal?

From the March 1998 ACP Observer, copyright 1998 by the American College of Physicians.

By Michael J. Werner, JD

This is the second in a series of hypothetical case studies designed to illustrate how the fraud and abuse laws can be applied to everyday scenarios. It focuses on the prohibitions against physician referrals.

Case study

A Group of Internists (AGI) is a 10-person multi-specialty internal medicine group that provides general internal medicine, hematology and oncology services. AGI's patients are primarily Medicare beneficiaries.

Physicians at the group have the opportunity to invest in a new, freestanding ambulatory care center that will provide, among other services, chemotherapy. Another option is that AGI could expand its office suite and provide the same services on site.

Under the fraud and abuse laws, what are the implications for these ventures?


The Ethics in Patient Referrals Act and subsequent amendments were written to prevent health care providers from overusing Medicare services. The legislation is named after its main sponsor, Rep. Fourtney "Pete" Stark (D-Calif.), and is known as Stark I and Stark II. The laws are designed to regulate physician behavior.

In 1988, a report from the Department of Health and Human Services found that patients of referring physicians who owned or invested in independent clinical laboratories received 45% more lab services than other Medicare recipients. A few years later, another study found that physicians with a financial interest in joint venture imaging centers had higher referral rates for almost all types of imaging services than other physicians. Numerous other studies have shown increased utilization of services when physicians have a financial interest in an entity to which they refer patients. Lawmakers passed the Stark laws to curb these practices.

Taken together, the Stark laws prohibit physicians from referring Medicare beneficiaries for "designated health services" to an entity with which they have a financial relationship. While Stark I only prohibited referral to clinical labs, Stark II expanded the prohibition to the current list of "designated health services." (For more details on how the laws define financial relationships and designated health services, see "How the new Stark II regulations will affect doctor pay," this page.) Because chemotherapy is likely to be defined a designated service as an "outpatient prescription drug" under the law, AGI physicians cannot refer Medicare patients to a center in which they have a financial interest—unless they meet one of the law's exceptions.

The law contains two sets of exceptions, one for group practices and one for non-group practice situations. Consequently, the key is to determine whether AGI is a group practice.

According to Stark II, a group practice is a legally organized group of two or more physicians in which the members provide the majority of the physician services. The law also requires that the physicians share office space, facilities, equipment and personnel; that substantially all of the services of the group members are provided through the group and billed under a single group number; and that members of the group conduct no less than 75% of the physician-patient encounters. Moreover, the compensation of the group's physicians cannot directly or indirectly reflect the volume or value of their referrals.

Because AGI is a group practice, it qualifies for several exceptions to the law's regulations. Specifically, the law defines three activities as protected from regulation:

  • Referring a patient for a designated service that will be performed by another physician in the group.
  • Referring a patient for a designated service furnished by the referred physician himself, another physician who is a member of the same group, or by someone directly supervised by a member of the group (often interpreted to mean employees of the physician practice). The only catch is that these services must be provided in a building in which other non-designated services are also performed.
  • Referring a patient to a hospital in which physicians have a financial interest, as long as that relationship existed before Dec. 19, 1989.

Because none of the exceptions are applicable to AGI's possible investment in the center, the physicians should not invest in the center if they intend to refer patients to it.

On the other hand, providing the services on-site may be a legal option. That's because providing chemotherapy services in the office would fall under the exception that allows physicians to refer designated health services to other physicians in the same group. If AGI oncologists or AGI employees acting under the supervision of AGI physicians administered chemotherapy, it would be a protected activity. To ensure that the arrangement is legal under Stark, however, AGI must be sure to structure its compensation system so that it does not pay physicians in a manner that is related to the volume or value of the referrals for this service.

If AGI physicians are unsure about whether their proposed activity would violate the self-referral ban, they can request an advisory opinion from the Department of Health and Human Services. The opinion binds the government and the requesting party only, however, and is not available for arrangements with clinical labs. More information about how to obtain an advisory opinion is available on HCFA's Web site at

Michael J. Werner is Counsel for Health Policy in ACP's Washington, D.C., office.

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